6.5 Solutions: property rights, regulations, and incentive policies  (Page 3/14)

Individual standards

First, we discuss a kind of policy applied to individual people or companies called a technology standard    . Pollution and resource degradation result from a combination of human activity and the characteristics of the technology that humans employ in that activity. Behavior can be difficult to monitor and control. Hence, lawmakers have often drafted rules to control our tools rather than our behaviors. For example, automakers are required to install catalytic converters on new automobiles so that cars have lower pollution rates, and people in some parts of the country must use low-flow showerheads and water-efficient toilets to try to reduce water usage.

Technology standards have the great advantage of being easy to monitor and enforce; it is easy for a regulator to check what pollution controls are in the design of a car. Under some circumstances technology standards can reduce pollution and the rate of natural resource destruction, but they have several serious limitations. First, they provide no incentives for people to alter elements of their behavior other than technology choice. Cars may have to have catalytic converters to reduce emissions per mile, but people are given no reason to reduce the number of miles they drive. Indeed, these policies can sometimes have perverse effects on behavior. Early generations of water-efficient toilets performed very poorly; they used fewer gallons of water per flush, but people found themselves flushing multiple times in order to get waste down the pipes. Thus, these standards are neither always efficient nor cost effective. Second, technology standards are the worst policy in the toolkit for promoting technological innovation. Firms are actively forbidden from using any technology other than the one specified in the standards. Automakers might think of a better and cheaper way to reduce air pollution from cars, but the standard says they have to use catalytic converters.

A second type of policy applied to individual agents is called a performance standard    . Performance standards set strict limits on an outcome of human activity. For example, in order to meet the NAAQSs, state EPA offices set emission standards for air pollution sources in their states. Those standards limit the amount of pollution a factory or power plant can release into the air, though each source can control its pollution in any way it sees fit. The limits on pollution are the same for all sources of a given type (e.g., power plant, cement factory, etc.). Performance standards are also used in natural resource regulation. For example, because stormwater runoff causes flooding and harms aquatic habitat, the city of Chicago requires all new development to be designed handle the first inch of rainfall in a storm onsite before runoff begins.

To enforce a performance standard the regulator must be able to observe the outcome of the agents' activities (e.g. measure the pollution, estimate the runoff). If that is possible, these policies have some advantages over technology standards. Performance standards do give people and firms some incentive to innovate and find cheaper ways to reduce pollution because they are free to use any technology they like to meet the stated requirements. Performance standards are also more efficient because they give people and firms incentives to change multiple things about their activity to reduce the total cost of pollution abatement; a power plant can reduce sulfur dioxide emissions by some combination of installing scrubber technology, switching to low-sulfur coal, and reducing total energy generation.